Cardinal Health will strive to build on early lead in Chinese market

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Carrie Ghose

As the first of the big three U.S. pharmaceutical distributors to enter China, Cardinal Health Inc. is reporting a warm reception from the Chinese government and eager inquiries from drug and medical device manufacturers looking for a trusted gateway to a zooming market.

CEO George Barrett called China the world’s most important emerging market at investment conferences hosted in March by JPMorgan Chase & Co. and Citigroup Inc., where he discussed the Dublin company’s $470 million acquisition of Yong Yu. Cardinal bought the former subsidiary of Swiss distributor Zuellig Pharma Holdings Ltd. last November.

It also is the largest international move for a company that already has a medical distribution business in Canada and 16 medical supply facilities in seven countries. JPMorgan calls for international business to represent 15 percent of Cardinal’s operating margin in five years.

China is projected to overtake Japan as the second-largest pharmaceutical market by 2015, Barrett said, and its government is undertaking a health-care reform effort to lower costs while expanding access to care for its more than 1 billion citizens. And the medical distribution market “is incredibly fragmented,” he said, with more than 10,000 companies.

“The Chinese government has expressed interest in seeing further consolidation,” said Barrett, who has met with officials. “So we expect to get the opportunities for growth not just from being in the right market, but ... at the right stage of its evolution.”

The government has made “explicit calls for a more-sophisticated supply chain,” JPMorgan analyst Lisa Gill wrote in a report. “We believe experience and expertise Cardinal Health brings puts them in a position to become a thought leader.

“Manufacturers concerned about quality control and counterfeit products may be more likely to select Yong Yu as a distributor due to the Cardinal reputation,” she said.

Barrett said those manufacturers’ “interest in China is very substantial and has some urgency to it.”

Inexperience with an incredibly complex economy is a risk, and Cardinal’s success is “by no means assured,” said Oded Shenkar, Ohio State University Fisher College of Business professor of management and human resources. Across all industries, the majority of cross-border acquisitions end up failing, he said.

“Some of the capabilities that Cardinal has here will not necessarily be deployable over there,” Shenkar said. “It takes a lot of work. Very often it takes a tremendous adjustment in your business model. You’re talking about one of the most difficult markets in the world to penetrate.”

More open policies in recent decades have made China a strategic market for U.S. companies, especially if they find a strong local partner, said Weihua Peng, associate professor at Sichuan Business Vocational College in Chengdu, who just completed six months in Columbus researching trade policy as Franklin University’s first exchange scholar.

Yong Yu is a well-known and respected player that hasn’t been hurt by foreign ownership, she said. Shanghai-based Yong Yu is pegged at about ninth among the top 10 distributors that control a third of the market, having relationships with the majority of hospitals, clinics and pharmacies, according to JPMorgan. It has 700 employees and more than $1 billion in sales. As the only major distributor that’s foreign-owned, it’s China’s largest drug importer.

“The company has specifically targeted the highest quality products, which are sold to the highest income patients and carry the highest profitability,” Gill wrote. “We believe this should position Yong Yu well for the continued emergence of China’s middle class.”

Hospitals dispense 70 percent of drugs sold in China, and that’s an advantage to hospital-focused Cardinal, she wrote. Gill projected that Cardinal will spend about $50 million in acquisitions in China over the next few years and spend $100 million more on Yong Yu for working capital and construction, including a second warehouse it is building in Shanghai.

614-220-5458 | cghose@bizjournals.com

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